In 2002, the FDIC continued to position
itself to meet the demands of
an evolving banking industry  one
that is being reshaped by institutional
consolidation, globalization
and technology. The Corporation
assumed a major leadership role
on significant economic and policy
issues, pursuing the enactment of
deposit insurance reform legislation
and sponsoring several symposia for
regulators, policymakers and others
on other important public policy
issues. It also directed increased
attention to new and emerging risks
in the banking system, focusing
more resources on larger institutions
and those identified as posing a
higher potential risk to the deposit
insurance funds. The FDIC implemented
a streamlined organizational
and management structure and
appointed a new management team
to lead it into the future.

Highlights of the Corporations 2002
accomplishments in each of its three
major business lines are presented
below.

Insurance

The FDIC insures bank and savings
association deposits to help ensure
the stability of the financial system
and the publics confidence in the
U.S. banking system. As insurer,
the FDIC continually evaluates how
changes in the economy, the financial
markets and the banking system
affect the adequacy and the viability
of the deposit insurance funds.

The FDICs efforts in 2002 focused
on deposit insurance reform, other
activities to promote sound public
policies, expanded examination
activities and dedicated examiner
program, new international capital
standards, and resolving failed
institutions.

Deposit Insurance Reform
The FDIC gave priority attention
to enactment of comprehensive
deposit insurance reform legislation
in 2002. Legislation containing major
elements of the FDIC deposit insurance
reform proposals developed
over the past three years was
introduced both in the House of
Representatives and the Senate.
On April 23, the FDICs Chairman
testified before the Senate Banking
Committee on the FDICs proposals
for deposit insurance reform.

The FDIC's recommendations, which
were summarized in the testimony,
include:

Granting the FDIC's Board of
Directors the flexibility to manage
the combined deposit insurance
fund. Under the present system,
statutorily mandated methods of
managing the size of the BIF and
SAIF may cause large premium
swings and could force the FDIC
to charge the highest premiums
during difficult economic times
when the industry can least afford
it. Currently, safer institutions
subsidize riskier institutions
unnecessarily while new entrants
and growing institutions avoid
paying premiums. To correct
these problems, the FDIC recommended
that Congress give the
Board of Directors the discretion
to:

Manage the combined fund
within a range.

Price deposit insurance according
to risk at all times and for
all insured institutions.

Grant a one-time initial assessment
credit to recognize
institutions past contributions
to the fund and create an
ongoing system of assessment
credits and rebates to prevent
the fund from growing too large.

Indexing deposit insurance coverage
to ensure that basic account
coverage is not eroded over time
by inflation and increasing the
current level of deposit insurance
coverage for retirement accounts.

The House passed H.R. 3717, the
Federal Deposit Insurance Reform
Act of 2002, on May 22 by a vote of
408 to 18. Although the Senate did
not pass either H.R. 3717 or a similar
Senate bill, S. 1945, the Safe and
Fair Deposit Insurance Act of 2002,
during the 107th Congress, the
Corporation successfully addressed
many key issues surrounding deposit
insurance reform, establishing
a sound base for future passage
of legislation. Enactment of deposit
insurance reform will remain a
priority of the FDIC during the 108th
Congress. The FDIC will continue
to examine in greater detail how
to implement risk-based pricing for
deposit insurance and methods that
could be used to create objective
measurements of an insured depository
institutions risk.

Since implementation of pending
deposit insurance reform legislation
was not enacted, development of
a final pricing recommendation and
implementation plan for inclusion in
a notice and comment rulemaking
during 2002 was put on hold. The
FDIC continues to refine these
options and explore other possibilities
for using objective measures to
price deposit insurance premiums.

Other Activities to Promote Sound Public Policies
In addition to its leadership on deposit insurance reform, the Corporation sponsored three policy symposia and hosted various conferences and workshops during 2002 on major issues of concern to the banking industry and regulators. In June, the FDIC held a symposium on "Enhancing Financial Transparency" that attracted Congressional members and staff, bankers, academics, regulatory policy makers, financial analysts and the media. In July, the FDIC and Credit Suisse First Boston co-sponsored a symposium on the "Rise of Risk Management: Basel and Beyond." At that meeting, top government officials and leading experts from Wall Street, the business sector, the accounting profession and academia discussed the importance of appropriate risk management policies and procedures. In September, the FDIC co-sponsored with the Journal of Financial Services Research a symposium on pricing the risks of deposit insurance. Leading scholars and researchers examined the latest developments in credit risk modeling and related risk measurement methods and their implications for deposit insurance pricing. The FDIC also hosted economic roundtables on the economic outlook and the risks of deflation and the U.S. housing market and consumer sector.

The FDIC also began publication
in early 2002 of an electronic news
bulletin called FYI, with over 5,000
subscribers by year-end. FYI summarizes
emerging issues in banking,
finance and the economy. The format
is designed to complement the FDICs
in-depth reports and publications. FYI
also serves as a vehicle for releasing
analytical work as it becomes available.
In addition, a quarterly communication
entitled Letter to the Stakeholders
has been released for FDIC-insured
institutions, employees, and other
stakeholders and highlights the
FDICs current initiatives and key
performance indicators.

In February, Chairman Powell
established a new FDIC Advisory
Committee on Banking Policy to
provide advice and recommendations
to the FDIC on a wide range
of issues relating to the Corporations
mission and activities, and examine
how the FDIC can improve its effectiveness
and address larger issues
facing the financial services sector.
The committee is composed of 12
members representing a cross-section
of distinguished leaders from
academia, economics, financial
services, private industry, public
affairs and the public interest community.
The committee convened
for the first time on November 13
in Washington, DC.

Expanded Special Examination
Activities and Dedicated Examiner
Program
In 2002, the FDIC focused increased
examination resources on larger
institutions and problem institutions
where the risks to the funds are greatest, while streamlining examinations
for those posing less risk.
One key component of this shift was
an expansion of special examination
activities in non-FDIC supervised
institutions.

On January 29, the FDIC Board of
Directors adopted an agreement
with the Office of Thrift Supervision,
the Office of the Comptroller of the
Currency, and the Board of Governors
of the Federal Reserve System that
enables the FDIC to examine insured
depository institutions (IDIs) that
represent a heightened risk to the
deposit insurance funds. The Federal
Deposit Insurance Act provides
that the FDIC Board can authorize
special examinations of any insured
depository institution whenever
such an examination is necessary
for insurance purposes. The FDIC
has long considered it a top priority
to examine all insured banks and
thrifts as needed to assess their
financial condition and degree of
risk to the insurance funds. This new
agreement establishes an improved
process for determining when the
FDIC will use its authority to examine
any insured institution and provides
for enhanced coordination and cooperation
of the agencies supervisory
efforts. These measures will ensure
that the FDIC will be able to fulfill
its responsibilities to protect the
deposit insurance funds in the most
efficient and least burdensome
manner possible.

The agreement provides that the
FDIC may conduct special examinations
of any IDI that:

Has a "3," "4" or "5" CAMELS
composite rating (for the adequacy
of capital, the quality of assets,
the capability of management,
the quality and level of earnings,
the adequacy of liquidity, and
the sensitivity to market risk), or

Is undercapitalized as defined
under the Prompt Corrective
Action provisions of Section 38
of the Federal Deposit Insurance
Act.

Under the interagency agreement,
the FDIC may seek to participate in
examinations or meetings with senior
bank management of institutions
that exhibit material deteriorating
conditions or other adverse developments
regardless of their current
rating at the invitation of, or without
the objection of, the primary federal
regulator.

The interagency agreement also
provides for the FDICs establishment
of a dedicated examiner program
for the eight largest banking organizations.
Because of their size and
market share, these eight "large
insured depository institutions" (LIDIs)
expose the deposit insurance funds
to substantial risk. Assets controlled
by these eight institutions represent
approximately 41 percent of industry
assets. A similar level of concentration
also exists on the deposit side 
approximately nine percent of all
domestic deposits are held by one
LIDI.

The FDIC is not the primary regulator
for the eight LIDIs. However, the
FDICs eight dedicated examiners,
selected in August 2002, serve as
the FDICs primary points of contact
for the oversight of these institutions.
Pursuant to the agreement, to the
fullest extent possible, the FDIC
will continue to rely on results of
the work performed by the primary
federal bank supervisors in assessing
the condition and risk-management
practices of individual institutions.
The dedicated examiners are provided
access to supervisory personnel and
supervisory information, including
risk assessments, supervisory plans,
reports of examination and other
documents related to these eight
banks, and are invited to participate
in certain examination activities.
The dedicated examiner program
allows the FDIC first hand, timely
access to information needed to
stay fully abreast of the risks in
these institutions and to quickly
recognize when new risks emerge.

To assist the FDIC in quickly identifying
and prioritizing areas of risk both
to groups of banks and to specific
institutions, a Risk Analysis Center
(RAC) will be established in 2003 to
serve as a central clearinghouse for
vital bank risk information. The RAC
will place special emphasis on the
timely analysis of information generated
by the dedicated examiner
program.

New International Capital
Standards
Internationally, the FDIC continues
to participate in a number of global
supervisory groups, including
the Basel Committee on Banking
Supervision. The FDIC actively
participated in the Committees efforts to update and revise the
1988 Basel Capital Accord to make
the capital standards of internationally
active banks more comprehensive,
risk-sensitive, and reflective of
advances in banks risk measurement
and management practices,
while continuing to ensure these
banks maintain adequate capital
reserves.

The FDIC invested resources on
several fronts to ensure that the new
Accord, when final, will be compatible
with the agencys roles as both
insurer and supervisor of banking
organizations. The FDIC was well
represented on several committees,
task forces and groups that published
documents for industry review during
2002. These included: "Quantitative
Impact Study 3," which is serving
as a comprehensive field test of
the proposals for revising the 1988
Accord, and the "Second Working
Paper on the Treatment of Asset
Securitizations," which introduces
more risk-sensitive approaches for
addressing many of the emerging
risks in the rapidly growing securitization
market.

Resolving Failed Institutions
During 2002, the FDIC resolved
11 financial institution failures.
These failed institutions had a total
of $2.6 billion in assets and $2.2 billion
in deposits. By the next business
day after each failure, the FDIC
had issued payout checks to insured
depositors, or depositors had access
to deposits determined to be insured. (See the accompanying table for
details about liquidation activities.)